Wednesday, July 18, 2018

Business Models for Blockchain-based Ventures: An Exploratory Study

As the total amount
of funds invested through ICOs in blockchain-related ventures reaches twelve
billion dollars (Q1-2018) accounting for more funds raised than the entire 2017
[1], it becomes paramount to gain a crisp understanding of which business models
may be leveraged to deliver on the promises to build a new breed of solutions
harnessing the potential of the internet of value.

With this awareness
in mind, we (Michele Osella, Riccardo Rostagno and myself) set off to
conduct an international exploratory study on the business models emerging in
the ecosystem of public blockchains. More specifically, the study aimed at
answering the following research questions:

RQ #1: Along which
dimensions can the blockchain ecosystem be mapped?

RQ #2: What are the
key archetypal actors and their strategic positioning?

RQ #3: What
emerging business models are enabled by blockchain?

To answer the above
questions, thirty-two ventures leveraging public blockchains were analysed,
resulting into twenty business models identified. In the remainder of the post,
I will briefly outline the highlights of the study while a more comprehensive
view of the results obtained may be found in the presentation linked at the
bottom of the post.

A number of notable
attempts have been made so far to map the blockchain ecosystems (eg: Lange and Nussbaum, to name a few). Nevertheless,
despite being commendable efforts, most of the early outputs generated suffered
from a number of methodological shortcomings having to do with lack of
exhaustivity as well as lack of homogeneity in the categories used. We are thus
proposing a “blockchain value ecosystem framework” (see Figure 1) as a first
step toward overcoming the issues listed above. The framework identifies four
technological layers clarifying the primary ingredients constituting a
blockchain-based solution. It consists of a simple yet clear representation
that may help companies in understanding what DLT (distributed ledger
technologies) may offer and how to approach them.

Figure 1. Blockchain value
ecosystem framework

In the picture below (Figure 2), a few real life actors have been mapped against the framework to
exemplify how it may be used to understand the different levels of vertical
integration that any given company may decide to adopt with respect to
blockchain absorption. It goes without saying that the higher the level of
integration the higher the requirements in terms of technological skills and
financial resources necessary for developing and adopting a blockchain-based
solution.

Figure 2. Map of real life actors

For the
classification of the key archetypal actors and their strategic positioning
with respect to the different blockchains available on the market, the
framework was complemented with an additional dimension considering whether the
company analysed was operating on a single blockchain or on multiple
blockchains. This resulted in a two by two ecosystem matrix answering RQ #1 and
identifying four strategic positions, one for each quadrant (Figure 3):

Decentralized-application Providers

Protocol Providers

Financial Platform Providers

Protocol Innovators.

Figure 3. Four strategic
positions

By placing the
ventures analysed in the different quadrants, it was subsequently possible to
cluster them into eleven archetypal actors (RQ #2): five of which positioned in
the distributed-applications providers quadrant and two situated in each of the
other quadrants (Figure 4). In this respect, it is important to note that while
DLTs are still in an “infrastructural phase”, that is to say a phase in which
enabling infrastructures are still being developed, a dominant design has not
emerged yet and most of the value generated is captured by the lower layers of
the technological stack [2]. Moreover, the upper left quadrant - where
distributed applications (DApp) are designed - represents a very fruitful
business model innovation sandbox for devising approaches that have the
potential to disrupt large rent-seeking incumbents across many different
industries in the long-term.

Figure 4. Eleven archetypal
actors

From the analysis
of the real life actors, it was subsequently possible to single out one or more
business models that could be associated to each archetypal actor. To
exemplify, among the mining companies analysed, four business models were
identified: (1) solo mining in which
the mining activity is conducted by a single company fully shouldering the
infrastructural costs and the risks associated with the mining activity; (2) pool mining in which companies are
sharing their infrastructure and the risk associated to mining; (3) cloud mining in which the company is
renting its computing infrastructure to third parties thus shifting the risk
associated with mining on the clients; and (4) mining marketplaces that are acting as brokers between
infrastructure owners and buyers of mining services.

Due to length
constraints, it is not possible to discuss in-depth all the business models
identified, nevertheless for each of them a Business Model Canvas explaining
the underlying value logic has been inserted in the appendix of the
presentation linked at the bottom of the post.

Figure 5. Twenty emerging business models

Finally, the
analysis of the thirty-two ventures brings to the fore dissimilar maturity
levels in terms of business model robustness for the various quadrants. More
specifically, the quadrants of protocol providers (lower-left) and that of
financial platform providers (upper-right) show a higher level of maturity in
terms of presence of a wide users’ base, identification of a clear value
proposition and tested value appropriation mechanisms. For what concerns the
other two quadrants instead, the situation is diversified among the actors
operating in the distributed applications quadrants (upper-left) while a low
level of maturity is present in the protocol innovators quadrant (lower-right)
which is made up of companies that are still exploring possible business models
for solving technical scalability issues.

Figure 6.
Business models maturity

To conclude this
post, we would like to share a number of reflections on the relationship
between blockchain and business strategy spurred by the analyses conducted
during the exploratory study.

First, a clear
understanding of the ingredients composing a full stack blockchain-based
solution needs to be acquired by CEOs willing to leverage blockchain in their
core business activity. In this respect, the blockchain value ecosystem
framework provides an accurate yet intuitive instrument for choosing the
appropriate level of vertical integration in the adoption and development of
blockchain-based solutions.

Second, four
strategic positions were identified with significant differences in terms of
capital intensity, technical proficiency required and depth of understanding of
the overall blockchain ecosystem. Choosing the right position for a venture
requires a careful analysis of the presence, possibility to access and ability
to manage the above aspects.

Third, twenty
business models were mapped with different levels of maturity with respects to
their ability to clearly identify their value proposition and the mechanisms
for capturing part of the value created. In this respect, the availability of
significant financial resources for startupsat a very early stage of development combined with the presence of
seigniorage economic benefits coming from the possibility to mint tokens, in
many instances has reduced the pressure on cash flows thus allowing companies
to focus more on technical challenges. While this in the short-term this may
help raising the level of technological excellence of the blockchain ecosystem,
in the long-run it could pose serious sustainability challenges.

Finally, from a business model perspective, the emergence of blockchain technologies seems to
have generated three types of innovations: (1) the birth of business models for
blockchain-specific activities such as mining; (2) the possibility to combine
into a single business model activities previously conducted by different
players (eg: payments & reputation, chat & payments); (3) the emergence
of light intermediation opportunities in which the middleman may adopt
revenue-sharing mechanisms that promote a fairer redistributions of the overall
value generated by all the engaged stakeholders.

Should you be
interested in discussing more in depth the results of the study, don’t hesitate
to get hold of me via Linkedin or Twitter.

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